Estate Planning is an important component of successful financial planning. The constant increase in blended families further highlights the emphasis that should be placed on this area, as there are often various relationships that need to be considered to ensure that the generational transfer of wealth is distributed as desired and in an equitable manner.

A good estate plan, particularly with blended families, should have certainty as a main priority, followed closely by tax efficiency and asset protection.

Estate Planning includes, but is not limited to, Wills, Power of Attorneys, Superannuation Nominations and overall structuring of asset ownership.

This article is focused specifically on superannuation pensions.

The basic financial cycle of a person’s life often involves building up assets in their personal name (or related entities), contributing these assets to superannuation as they near retirement (for tax and asset protection purposes) and then drawing down on the assets to cover living expenses throughout retirement.

Given that a large portion of a person’s wealth will often be in superannuation upon their death and that they will often be drawing down on their super in the form of a pension, the initial establishment of superannuation pensions is important. The most common form of a superannuation pension is known as an ‘account based pension’. It is possible to commence other types of pensions with super, however many benefits of these other pensions were overridden when ‘Simpler Super’ was introduced.

When a pension commences, a recipient will receive a certain rate of income from the pension, generally based on their age and account value. When the pension recipient passes away, the pension account will convert back to accumulation phase. It will then be paid out to the stated beneficiaries in the superannuation nomination previously provided by the deceased to the trustees of the super fund. If no nomination was provided to the trustee, the trustee will use their discretion and make payment to the deceased’s dependants, having regard to their relationship just prior to death. Sometimes the trustee will simply pay the benefits to the deceased’s estate where it will be distributed in accordance with the Will.

Providing superannuation nominations to the trustee of a fund can provide a high degree of certainty as to who will receive the benefits. However, just like a Will, superannuation nominations are susceptible to a challenge from people who were not intended to benefit, such as a former spouse or an estranged child.

An alternative would be to make the pension ‘reversionary’ upon its commencement. This must be opted for specifically if starting a pension through a public offer fund, or stated clearly in the Fund documentation of a Self Managed Superannuation Fund. When a reversionary pension commences, the recipient will nominate who they would like the pension to automatically revert to upon their death. Therefore, if the initial recipient of a reversionary pension passes away, the balance will not convert back to accumulation phase and be paid out in accordance with the nomination, but rather will continue along and simply pay the income stream to the new pension recipient.

A reversionary beneficiary of a pension can only be one of the following people:

• A spouse (including de facto)
• A child (including step-child) under the age of 18, or between 18-25 and financially dependent on the deceased just prior to death
• A person who lived in an ‘interdependency relationship’ with the deceased
• A person who was financially dependent on the deceased

A reversionary pension can significantly reduce the likelihood of a challenge compared to an ordinary pension, as there is technically no death benefit being paid out. There are also taxation benefits associated with a reversionary pension, as the assets supporting the member’s account (with potentially large unrealised capital gains) will not need to be converted back to accumulation phase, sold down and consequently incur capital gains tax upon the member’s death.